CIMB Securities 2015-08-13: Golden Agri-Resources - 2Q15; Bracing for higher depreciation. Maintain REDUCE.


Bracing for higher depreciation 

  • Golden Agri’s 1H15 core net profit of US$110m was broadly in line with our expectations, at 65% of our full-year forecast, but met only 47% of consensus forecast. 
  • Core net profit fell 27% yoy due to weaker prices for its palm products and lower output. Reported earnings fell short due to US$54m net forex losses. 
  • The positive takeaway is the better downstream performance but this was offset by weaker FFB output. 
  • We downgrade our earnings forecasts for FY16-17 by 26-30% to reflect a higher depreciation charges following the adoption of accounting changes for biological assets effective 2016. This cuts our target price to S$0.28 (based on 15x CY16 P/E or its historical avg P/E). 
  • We maintain our Reduce call given our concern over weaker CPO prices. 

1H15 earnings impacted by lower output and price 

  • Golden Agri posted weaker 1H15 core earnings due to lower selling prices for its palm products and production. FFB output from its nucleus estates fell 4% yoy in 2Q15 and 5% in 1H15 due to dry conditions at some of its estates last year. 
  • The ASP achieved for CPO declined 23% yoy in 2Q15 to US$650 per tonne, in line with global prices. The lower production raised its average production cost to US$308 per tonne in 2Q and US$314 per tonne in 1H15. Stocks were lower at 465k tonnes at end-June compared to 498k tonnes at end-Mar as the group reduced inventories ahead of the implementation of the CPO levy. 
  • Its palm and laurics business posted a 38% jump in 1H15 earnings as it benefited from the potential levy implementation. 
  • Its oilseeds crushing business in China stayed profitable due to positive crush margins. 

Main takeaways from the teleconference 

  • The group maintained its output growth guidance of 0-5% but indicated that El Nino could lead to lower output. Some of its estates have seen lower rainfall which could impact next year’s output. 
  • It is building two 300,000tpa biodiesel plants in Indonesia which will be ready by 2016 and will benefit from Indonesia’s biodiesel policy. 
  • It guided that the IAS41 amendments could raise its depreciation charges and reduce its net profit by US$77m in FY16, larger than our rough estimate of US$32m. 
  • We lower our earnings to reflect this. 

Maintain Reduce with lower target price of S$0.28 

  • We maintain our Reduce call given the group’s unexciting near-term earnings prospects stemming from weaker CPO prices and slower output growth.

Ivy NG Lee Fang | CIMB Securities 2015-08-13
REDUCE Maintain REDUCE 0.28 Down 0.38